Europe stocks track U.S. higher, Italy sinks

LONDON (MarketWatch)—Italian bank shares dropped sharply on Monday, after the country’s technocratic Prime Minister Mario Monti over the weekend said he was prepared to resign, while the broader European stock markets tracked Wall Street higher

The Stoxx Europe 600 index
SXXP, -0.59%
climbed 0.1% to close at 279.55, its highest closing level since May 2011.

“We are in a range-bound market and we have seen European stocks trade in a fairly close range over the last weeks and it’s obviously due to the uncertainty about 2013,” said Morten Kongshaug, chief strategist at Danske Bank in Copenhagen.

“Italy is just an excuse to take a bit of profits and I don’t think [Silvio] Berlusconi will have the same effect on Italian politics as he has had,” he said.

Turmoil in Italy

Italian banks were among notable decliners, tumbling as political developments over the weekend set the stage for early elections, which could come by February. Monti said he was ready to step down as soon as parliament passes a pending budget law, after Silvio Berlusconi’s PDL party last week withdrew its support for Monti’s technocratic government.

“The campaigning looks set to be more confrontational with Berlusconi’s PDL party looking likely to step up the antiausterity and anti-German euro leadership rhetoric thus leaving markets nervous that Italy might find it difficult to maintain their current reform program,” analysts at Deutsche Bank said in a note.

The political uncertainty also spurred selling in the bond market, with the yield on 10-year Italian government bonds
IT:10YR_ITA
jumping 28 basis points to 4.81%, according to electronic trading platform Tradeweb. Yields rise as bond prices fall. A basis point is 1/100th of a percentage point.

“If we do see a widening of Italian bond spreads as the election approaches it may serve to remind voters and Italian politicians of the still precarious economic situation that Italy is in,” the Deutsche Bank analysts said.

Kongshaug from Danske Bank said investors worried that Spain’s interest rates would mirror a jump in their Italian counterparts, ultimately forcing Spain to formally ask for a bailout to trigger bond purchases from the European Central Bank.

“You will not see a crisis in Italy without it spreading to Spain,” he said.

“Spain cannot live with higher yields right now. Even with lower yields it looks unlikely to meet it’s budget deficit target of 4.5% of GDP and if interest rates come up as well they will have to ask for a bailout.”

Meanwhile, the Athens General Index
GD, -1.23%
jumped 1.4% to 852.63, as Greece extended the deadline for participating in its bond-buyback program until Tuesday 12:00 London time, or 7 a.m. Eastern. The initial deadline was last Friday at 5 p.m. London time.

Movers

Banks were also on the decline in other country-specific European stock indexes. In France, shares of BNP Paribas SA
BNP, -1.55%
slumped 1.9% and Société Générale SA
GLE, -2.32%
fell 1.6%. Credit Agricole SA
ACA, -1.97%
lost 2.6% after Goldman Sachs cut the stock to sell from neutral.

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